Fed Announces Plans to Produce Three New Reference Rates | Practical Law

Fed Announces Plans to Produce Three New Reference Rates | Practical Law

The Federal Reserve Board released final plans to produce three new reference rates based on overnight repurchase agreement (repo) transactions secured by Treasury securities.

Fed Announces Plans to Produce Three New Reference Rates

Practical Law Legal Update w-012-1793 (Approx. 3 pages)

Fed Announces Plans to Produce Three New Reference Rates

by Practical Law Finance
Published on 14 Dec 2017 • USA (National/Federal)
The Federal Reserve Board released final plans to produce three new reference rates based on overnight repurchase agreement (repo) transactions secured by Treasury securities.
On December 8, 2017, the Federal Reserve Board (FRB) released final plans to produce three new reference rates based on overnight repurchase agreement (repo) transactions secured by Treasury securities. The three reference rates are:
  • The Tri-Party General Collateral Rate (TGCR), which is based on transaction-level tri-party repo data from Bank of New York Mellon (BNYM). The TGCR excludes general collateral financing (GCF) repo data and transactions in which the Federal Reserve is a counterparty. The TGCR focuses on dealer-to-customer activities and captures the narrowest set of transactions of the three proposed rates.
  • The Broad General Collateral Rate (BGCR), which is based on transaction-level tri-party data from BNYM as well as GCF repo data from the Depository Trust & Clearing Corporation (DTCC). The BGCR focuses on both dealer-to-customer as well as interdealer activities and reflects a broader set of transactions than the TGCR.
  • The Secured Overnight Financing Rate (SOFR), which is based on transaction-level tri-party repo data from BNYM, GCF repo data from DTCC, and bilateral repo data from DTCC. SOFR is the broadest of the proposed alternative rates. The SOFR was recommended in June 2017 by the Alternative Reference Rates Committee as an alternative to LIBOR (see Legal Update, Fed Committee Announces GC Repo Rate as LIBOR Alternative for Financial Contracts).
These rates will be produced by the Federal Reserve Bank of New York (FRBNY), in cooperation with the US Office of Financial Research. The FRBNY intends to begin publishing the three rates during the second quarter of 2018.
The FRB had previously published a request for public comment on these three rates (see Legal Update, Fed Requests Comment on Proposed LIBOR Alternatives). After reviewing the comments received, the FRBNY has decided to publishes the three Treasury repo rates as proposed, with slight modifications and clarifications. As in the original proposal, each rate will be calculated as a volume-weighted median of transacted rates. One modification includes the adjustment of the expected daily publication time to 8 a.m. eastern time.
The overall commenters felt that the proposed rates would be useful in:
  • Providing a comprehensive view of pricing in the Treasury repo market.
  • Providing a good proxy for a risk-free rate.
  • Providing useful information regarding overnight demand and supply for funding.
  • Facilitating the creation of futures contracts that would allow market participants to hedge Treasury repos and spot-market Treasury purchases.